November 21, 2007

Cowen's crocodile tears blurring economic vision

Posted in Banks · 23 comments ·

Anyone who doubted the severity of the property slump here only has to look at the shares of the Irish banks. Last night, they were all touching new lows.

For those still in denial, consider that all the major banks here have lost over 50pc of their value since May. The reason is very simple — a housing recession is upon us and the banks are the only liquid stocks that investors who want to be protected from the downturn can sell.

It is highly likely that some of the same developers, who are now caught with property that they can’t sell, are the very ones speculating against the banks that gave them the leverage to buy property in the first place. Selling the banks is a logical hedging mechanism.

So, in the boom, the developers borrowed from the banks, helping to drive bank shares upwards by actively buying stock; today, they might be selling bank shares in an effort to reduce their exposure to the Irish property market!

JP Morgan once said that “nothing so undermines your financial wisdom as the sight of your neighbour getting rich”. This certainly held during the boom. Now that we are at the early stages of a recession in the housing market, the expression of John Maynard Keynes, with respect to financial markets, is apt; to those suggesting that share prices had fallen far enough in a slump, the great economist opined, “these markets can remain irrational, longer than you can remain solvent”.

So, in the case of Ireland, the upswing was made more dramatic by the behaviour of banks who lent to every Tom, Dick and Harry. This was normally a transfer of risk on the banks’ balance sheets as, in many cases, they had financed the developer who built the development in the first place. The banks took the view that, in a downturn, it is better that their risk be spread across hundreds of first-time buyers, rather than one big-fist developer.

The government, which gets 28pc of the price of every new house, was quite happy to keep the bubble inflated. As late as September, those who suggested that Ireland’s property market was the scam that it is, were denounced as “unpatriotic” by the Taoiseach. Well, by the looks of things, we’re all unpatriotic now! Even his dauphin, Brian Cowen, was uttering treasonous words yesterday, suggesting that government revenues were faltering because of the slump in the property market, “which had to happen”.

Hold on a second minister, you did not expect this. The minister and all the other cheerleaders were not forecasting that six months ago! Back then, the script — repeated like a mantra by every estate agent, stock broker, banker and politician — was that the economy was in great shape, a little tinkering with stamp duty and everything would be fine. So, these vested interests were still luring the average young worker into the fraud of houses that cost 15 times the average salary but which have no resale value.

Rather than observing their democratic responsibility, which should put them on the side of the people, this government and, worse still, the Fianna Fail party, stayed firmly in the pockets of the big developers. Instead of warning the average Joe that things might not be so rosy, they continued to talk up the housing market, when it was clear to anyone with even the slightest grasp of Junior Cert economics that our miracle was nothing but a large overdraft.

In reality, the thread that spun the tangled web, which linked government revenues to house prices, bank share prices and negative equity, is five years of economic mismanagement.

This shouldn’t come as a surprise to any of our top politicians, as it was they who presided over an economy that became totally interlinked with the fortunes of the housing market. To say that the economic debate became hijacked by property developers and their political and financial concubines, would be an understatement.

Now, we are facing the exposure of subprime mortgage practices in Ireland, which Davy Stockbrokers, in a report early this year, suggested might grow from €600m, now, to €4bn by 2010. The report implied that 10pc of the total Irish mortgage market could be subprime in a few years. However, this won’t happen, as the subprime market is dead.

A few days ago, a board member of Central Bank privately suggested that Ireland did not have a subprime issue and went on to congratulate the Central Bank and its ECB colleagues for their speedy injection of funds into the European markets when this crisis broke, in August.

However, the problem with subprime is that it is only the thin end of the financial wedge. Subprime is only a name; the real problem is not the name, but the predatory lending we have seen in Ireland over the past few years.

In my book, a subprime lender is anyone who lent 100pc of the value of the asset, as well as a loan to cover the costs of fit-out, while varying the interest rate by using a sweetener in the first year. In addition, this lender extended the credit over a 30-year period, to a borrower who was being terrified daily by estate agents telling them to get in now, or else pay more next year. This is what was happening in Ireland. And, finally, we have the dominant government party that is financed by the very developers who are driving the whole scam in the first place.

This is what happened in Ireland. The minister’s crocodile tears for the lost boom are not believable. The slump in bank shares is simply the corporate equivalent of the pain being felt around the country as people realise that the era of easy cash is over. Now, the hard part begins.

The Government has options, but we need vision — much more than the semantics and budgetary whitterings we heard from the minister yesterday. In the words of his erstwhile cabinet colleague — it is now time to be radical or redundant.

  1. vince

    There is a huge difference between a problem for the state and a problem for the FF party and her followers. You might pick up the reason for this by close listening to the Ulick McEvaddys recent interview with RTE. The hint, the thing that really gets to FF, is answered by him when he responds to the Q of the Iraqui army.

    While the money thing is just crap, any who matter has moved from this market, long ago. All that has been left is squidgy money.
    Off topic a bit, how are they getting on with the road to Sligo through TARA.

    St Vincent’s, on the south side, while the Mother of Sorrows on the north. And St James, should one find, near TCD. But, it is very unusual for insects to emit of anything a human reacts. So it might be as well to reek in the direction to one two or t’other.
    On the 0ff chance you may be real.


  2. Jay

    C, Rabs,

    You could try holding on to the little F’n Effers. Convince yourself that they are really little pets? Perhaps even name them? They may itch, but the pained expression of people trying not to scratch in public is becoming much more common lately! ;-)

  3. Nick

    Has anyone got any figures on what % of Irish mortages are 100%+ borrowed and what sort of distress levels could we be seeing as well as default rates there are now and may be in the future? I would imagine that they can’t be anywhere on the scale of the US Subprime ie lending to the so called NINJAs? Or do I assume too much?

    Would also be interested to see what % of such loans are from property investors or those folks who invested into a second or third investment property during “the boom”?

    Also, anyone know what sort of general house price % fall across the board is predicted?

    Irish economic figures in this realm seem to be a cross between Central Bank estimates and local village gossip.

    What I am really trying to get a grasp of is a quantitative or econometric understanding of what the impact of the global credit, looming recession and Irish “end of the party” scenario might look like in the next few years?

    I am finding it hard to discern from all the bar stool economists in Ireland – present company excluded, of course !

    - D. Ricardo (Rathmines)

  4. The first time buyer was competing with the investor/speculator for his home in recent years, and 40% of all property purchased during the last decade ,we are told, was purchased speculatively.
    As the economy falters, thousands of foreign workers who rented these houses will leave.Speculators will likely flood the market with property when faced with a no rental income situation, and hope to retain some of the rapid appreciation value achieved in the boom (up to 100% in a recent 5 year period)
    Builders are wisely downing tools at present,and it may be some years before there is any worthwhile recovery in the construction industry.
    The fall in house prices has some way to go-but unlike the stock market it does not happen with the dizzy and frightening rapidity of bank shares.
    David is right though, many young buyers have been conned by the Builders Party, Fianna Fail.The profits Berties digout friends have made in it all are obscene-while ordinary people are dying from mis-diagnosis, antique medical equipment, long waiting lists.This is the price paid for the continual appeasement of every sectional lobby group,public sector union, and vested interest -such as the consultants association- in the country. The example from the top (mr Ahern) is the example taken by all others. “Every man for himself and the Devil take the hindmost.!”

  5. About the only certainty in the whole dismal situation, is that the Taoiseach will continue to serve as leader, and will be by our side throughout the looming recession,and for the full term of this government.
    He has re-iterated that, time and time again. Thank God this man thrives on adversity. Better men would have jumped ship by now. He is truly “The Great Survivor”, as this u tube video indicates:
    Might as well enjoy-as your shares and property assets plunge into the bottomless void..

  6. paddy cullen

    Back in April 2007, fears of a property crash swept the Spanish stock market, sending shares of construction companies into free-fall, and hitting banks exposed to the mortgage market. Spain’s biggest property group, Sacyr, fell 8.15%, while developers Colonial and Inmocaral plunged over 11%. In all Spain’s 10 largest publicly traded real estate stocks lost 1.7 billion euros ($2.3 billion) on concern that its eight-year rally in real estate may be over as interest rates rise and the government has confirmed that house prices are rising at the slowest rate since 1998. The concern also spread to Banco Sabadell and BankInter, which both fell over 5pc on concerns over mortgage arrears. The correction came as a warning sign for the real estate & construction industry in general and for banks that are exposed to the sector. This is in my opinion what is currently happening on the Irish stock exchange at the moment, in the period January 2007 to November 2007 the ISEQ has slumped by over 30%. Investors in recent months have been abandoning Irish stocks. As of today, the index is the worst performer among equity benchmarks for the 13 nations sharing the euro, and the only one besides Italy’s and Belgium’s that has fallen this year. A third of the ISEQ Index is made up of Ireland’s three biggest mortgage lenders. The main reason given for this slump is the fact that Irish house prices are dropping for the first time in five years and that the European Central Bank has signalled it’s not done raising rates. Although analysis does not point to any statistical relationship between house prices and stocks, given the two examples above it is my opinion that if one was bearish about the overall health of the Irish property market you should be short the stocks that you personally feel are most exposed to the market i.e. banks and construction stocks. Any gain on this trade could potentially offset any loss in your home value during a downturn in the property market.

  7. paddy cullen

    In Ireland there is more money tied up in residential property than in any other single physical asset. Accordingly, more vested interests dominate this market than any other market. The biggest vested interest of all is the current government. The proportion of the population who now own their own home are a very powerful political force. Any government in charge over a period when property prices collapse will not stand much chance at any subsequent election.

  8. Andrew

    Quite simply, Fianna Fáil led us into this mess. Despite boatloads of cash, we still have massive deficits in transport, communications, infrastructure, health and more. The failure to control planning has allowed Irish society itself to dissolve into a nation without communities, and families scattered across the counties in the effort to find a half-decent home worth living in for the long-term. For all this, the nation signed up for ridiculous mortgages it can’t afford, while Fianna Fáil pretended to all and sundry that we earned, and not borrowed, the cash. The social and economic effects of this mess will, literally, take decades to sort out.

    And we’re now supposed to think that complicit Cowen’s going to steer us through this little “blip”?

  9. Dónall Garvin

    This might not be the point but I don’t think that the Fianna Fáíl government can be blamed entirely for the coming house price crash.
    Everywhere in the world has experienced a property asset bubble in the last few years.
    Sure there policies in place to encourage property owning (and speculation) – but the country also has high stamp duty levels and the government makes 28% of each new house. We also had a large demographic shift and immigration added to the mix.

    The government has been if anything a little naive about the current situation – and if their territory is not the map – then they’ll get us lost on the wrong path.

  10. Callan

    “Everywhere in the world has experienced a property asset bubble in the last few years.” I doubt that very much. As far as I know property prices in Japan and Germany have been flatlining for quite some time. Demographics can only explain so much. A ridiculous number of residential properties in this country are empty, which suggests there isn’t much in the way of demographic pressure on the rental market. In spite of having both the highest natural population increase and immigration in Europe there isn’t an actual shortage of accomodation in this country.

    P.J. O’Rourke once said that when logic flys out the window there’s usually politics involved. I remember a few years ago taking the Luas from Steven’s Green to Stillorgan. One of the stops was right beneath a rather attractive apartment development. In spite of the location, the transport link and the aesthetic value of the property the hoarding proudly boasted it benefited from tax designation. At the moment I live and work in a midlands county that actually has “A Tax Designated County” in the welcome signs as you cross the county boundary. What this means is that jerry built townhouses have been thrown up even where there isn’t an actual town.

    Our slightly naive government don’t deserve the benefit of the doubt. They’ve had a whole decade to acquire some cop on. As a private sector worker, earning approximately what the Taoiseach awarded himself to bridge the teabag gap with other world leaders, I have this possibly selfish idea that we deserve rather more than naivety from him, his government and who knows how many advisers.

  11. We deserve a bl**dy revolution.!
    there´s nothing naive about Fianna Fail.
    The Sicilian Mafia could take lessons from them.

  12. Ed

    The housing bubble was caused by the government and it close friends homing in on the basic “nest instincts” of the human and exploited it for all it was worth. The public went along with it like a bunch of heard animals, but herd animals are always on the move and don’t build nests – so the great “ Irish Takeaway” has no parallels in nature except that of the government and its friends behaving as a pack leading and driving the heard into a trap where it could easily be savaged.
    Now, the question is, will the species survive?

  13. brian cowen

    well said David, after that article i’m not supporint digoutday,

  14. Glen Quinn

    All I have to say is “Bertie Ahern is on the right path to become a dictator”

  15. Glen Quinn said,
    on November 24th, 2007 at 4:45 pm
    All I have to say is “Bertie Ahern is on the right path to become a dictator”

    Yes,he has arrived there with the help of the Green party and an assortment of hisown “gene pool” comrades The Labour party would have filled the vacuum, if they were unavailible.
    Hungers Mother ,one and all.
    France recently elected a “right wing” president, Nicolas Sarkozy who is currently trying to curb the powerful public sector unions there.
    Ireland elected a unique and indefineable government, the Taoiseach of which has managed to be a socialist (benchmarking his public sector unions ) and a capitalist (no taxes on the wealthy and the abolition of the public health system) all at the same time.!

    The last of the resolute Trotskyites, Pat Rabbite, left the doomed ship SS Labour, in the last lifeboat,redundant- his clothes having been stolen (as with poor Joe Higgins) by the consummate captain of the unsinkable ,one Bart Ahern.!
    Can you see Enda Kenny overseeing the breaking of a country wide strike by civil servants and health service administrators- and sending in the Garda Siochana and the army to curb them?(Ho-ho!)

  16. Stephen

    I’m going to bore people with this, but I see inflation as more of a problem than house price crashes – just consider how many people you know are waiting to ‘pick up a bargain’ when the prices crash. You’ve got a whole cohort of buy-to-let people just waiting for the same thing.
    So, prices fall 20%, or 30%, is that really enough? We’ve had 100s of % rises during the past 10 years. Prices would have to fall something like 75% or more to get back to trend. That would shatter the economy. I just can’t see it, too many people have too much cash. Property money has fed into so many other sectors. If the economy’s going to reallign, which it has to at some point, my guess is inflation.
    As for politicians, they seem to me to be lazy and self seeking, rather than devious. They don’t seem to look up at the wider economy, being so obsessed with themselves, their ratings, and all the fun of being in power.

  17. shtove

    Inflation depends on the euro – if it stays strong, then the EZ should have a better time of it than, say, the US or even UK. It’s probably best to take a hit from currency strength rather than inflate the problem away. But then we’ve also got to look out for deflation because of a credit contraction.

    And do people sitting on the sidelines waiting to pick up residential property bargains really have sackloads of cash? Too many people tot up their assets without admitting their liabilities. And expectations of continued easy credit from the banks should be in reverse at this stage.

    There is an icy wind blowing out of the credit markets.

  18. Ed


    Politicians are not lazy – they’re simply incompetent. Look at the motley crew and ask what have anyone of them done in their lives other than play politics – it’s a sport. They’re all latching on to machiavellian techniques, but most people can see through that at this stage in our development. One minute they’re the big “kick ass” CEO commanding a massive salary and the next, they’re only a sort of PR front for what is really going in their departments and consequently they don’t have to take responsibility. It’s a great deal – don’t take it seriously – it’s only a sport.

  19. In case anybody missed today´s Sunday Indo article which pretty well defines the crisis and the culprits.

  20. Paul

    I hope the road to Sligo does not go thru Tara or I’ve been going the wrong way for years!

  21. Glen Quinn

    Get use to whats happening in France because its going to happen in Ireland.

    Think about it, most of the workforce are employed by the civil service, total up there out-rages salaries and pensions and try to balance the books.

    The simple answer is that Ireland can’t afford it and there will have to be cuts right across the civil service and a re-negotian of there pensions.

    Also our exports have been in decline for years, we have a very very small manufacturing industry which is getting smaller by the day and our agricultural industry is gone eg sugar

    Tough times are coming and its time to tighten the belt!

  22. Criostor

    I doubt the transport will affect us only.

    Look at the riots that have broken out again after a two yer absence, that’s what exactly will happen here in the next few years!

    I doubt we are mature enough to deal with such problems or prepared!

  23. laura

    “worse still, the Fianna Fail party, stayed firmly in the pockets of the big developers.” We’ve had 10 years of Moriarty and Mahon to tell us this, yet nobody has really listened. Part of the danger here is the kind of recession we’ll have and the fact that there is no longer an escape valve of other countries to migrate too, since they’re already in recession.

    I predict a recession that will make the 1980s look like a Children’s tea party in comparison. This government will almost certainly collapse, and sadly, leave the mess to the next coalition who will then end up footing the blame like FF have done of the governments who they shat carefully on before leaving government themselves in the early 1980s.

    The very fact that we are hardlinking social welfare rates to average wage values rather than the minimum wage is symptomatic of a total lack of common sense, never mind vision. As I have repeatedly argued here and in other forums, welfare rates have increased at double the rate of inflation and minimum wage increases for the last 5 years, while at the same time rent subsidies have increased (at the same time inflating market rents) thus creating a massive incentive not to work for those who have enough PRSI payments and are unlikely to do much better than the minimum wage.

    For example, in my own situation, were I to lose my job tomorrow, the combined replacement value of welfare plus rent subsidy alone would be almost 50% of my current take home pay. This isn’t welfare. This is a pension. And this is utterly, utterly unsustainable.

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